<PAGE> 1
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C, 20549
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2000
-------------------------------------------------
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ........................ to .....................
Commission File Number 33-93644 and 333-50839
----------------------
DAY INTERNATIONAL GROUP, INC.
-----------------------------
(Exact name of registrant as specified in its charter)
Delaware 31-1436349
--------------------------------- -------------
(State or other jurisdiction (I.R.S. Employer ID No.)
of incorporation or organization)
130 West Second Street, Suite 1700, Dayton, Ohio 45402
-------------------------------------------------- --------
(Address of principal executive offices) (zip code)
(937) 224-4000
---------------------------------------------------
(Registrant's telephone number including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
--- ---
The number of Common Shares, $0.01 per share par value, outstanding as of
November 1, 2000, was 23,298.
1
<PAGE> 2
DAY INTERNATIONAL GROUP, INC.
INDEX
<TABLE>
<CAPTION>
Pages
-----
<S> <C>
PART I FINANCIAL INFORMATION
Item 1. Financial Statements:
Condensed Consolidated Balance Sheets as of September 30, 2000
and December 31, 1999 3
Condensed Consolidated Statements of Operations for the three
and nine months ended September 30, 2000 and 1999 4
Condensed Consolidated Statements of Cash Flows for the nine
months ended September 30, 2000 and 1999 5
Notes to Condensed Consolidated Financial Statements 6 - 16
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations 17 - 20
Item 3. Quantitative and Qualitative Disclosures About Market Risk 20 - 21
PART II OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 21
Signature 21
</TABLE>
2
<PAGE> 3
PART I FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
DAY INTERNATIONAL GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, 2000 AND DECEMBER 31, 1999
(IN THOUSANDS)
<TABLE>
<CAPTION>
2000 1999
---------- -----------
<S> <C> <C>
ASSETS
Cash and cash equivalents $ 2,687 $ 508
Accounts receivable (less allowance for doubtful accounts of
$2,601 and $2,141) 37,079 35,240
Inventories 34,764 32,831
Other current assets 9,378 6,831
---------- -----------
Total current assets 83,908 75,410
Property, plant and equipment (net of accumulated depreciation of
$24,904 and $21,821) 66,789 69,739
Goodwill and other intangible assets (net of accumulated amortization of $40,169
and $32,832) 172,285 178,088
Other assets 8,717 8,267
---------- -----------
TOTAL ASSETS $ 331,699 $ 331,504
========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Accounts payable $ 8,086 $ 8,903
Current maturities of long-term debt 6,563 3,361
Other current liabilities 30,952 29,486
---------- -----------
Total current liabilities 45,601 41,750
Long-term and subordinated long-term debt 267,438 276,469
Other long-term liabilities 21,462 21,257
Commitments and contingencies
---------- -----------
Total liabilities 334,501 339,476
Exchangeable preferred stock 45,971 41,745
STOCKHOLDERS' EQUITY (DEFICIT):
18% convertible cumulative preferred shares 44,924 39,711
Common shares 1 1
Contra-equity associated with the assumption of
majority shareholder's bridge loan (68,772) (68,772)
Retained earnings (deficit) (20,596) (15,542)
Foreign currency translation adjustment (4,330) (5,115)
---------- -----------
Total stockholders' equity (deficit) (48,773) (49,717)
---------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) $ 331,699 $ 331,504
========== ===========
</TABLE>
See notes to condensed consolidated financial statements.
3
<PAGE> 4
DAY INTERNATIONAL GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2000 AND 1999
(IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------- -------------
2000 1999 2000 1999
----------- ----------- ----------- ----------
<S> <C> <C> <C> <C>
NET SALES $ 69,767 $ 44,569 $ 210,487 $ 130,660
COST OF GOODS SOLD 41,964 27,942 126,960 81,730
----------- ----------- ----------- ----------
GROSS PROFIT 27,803 16,627 83,527 48,930
SELLING, GENERAL AND ADMINISTRATIVE 14,550 7,407 44,591 22,790
AMORTIZATION OF INTANGIBLES 1,069 903 3,223 2,714
MANAGEMENT FEES 275 276 825 806
----------- ----------- ----------- ----------
OPERATING PROFIT 11,909 8,041 34,888 22,620
OTHER EXPENSES:
Interest expense (including amortization of deferred
financing cost of $576, $600, $1,728 and $1,800) 7,522 6,863 22,688 20,608
Other (income) expense 1,331 69 5,790 337
----------- ----------- ----------- ----------
8,853 6,932 28,478 20,945
----------- ----------- ----------- ----------
INCOME BEFORE INCOME TAXES 3,056 1,109 6,410 1,675
INCOME TAX EXPENSE 958 480 2,025 757
----------- ----------- ----------- ----------
NET INCOME 2,098 629 4,385 918
PREFERRED STOCK DIVIDENDS (3,146) (1,260) (9,298) (3,650)
AMORTIZATION OF PREFERRED STOCK ISSUANCE COSTS (47) (42) (141) (126)
----------- ----------- ----------- ----------
NET LOSS AVAILABLE TO COMMON SHAREHOLDERS $ (1,095) $ (673) $ (5,054) $ (2,858)
=========== =========== =========== ==========
</TABLE>
See notes to condensed consolidated financial statements.
4
<PAGE> 5
DAY INTERNATIONAL GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED SEPTEMBER 30, 2000 AND 1999
(IN THOUSANDS)
<TABLE>
<CAPTION>
2000 1999
---------- -----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 4,385 $ 918
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation and amortization 13,366 11,731
Deferred income taxes (2,742) (959)
Foreign currency loss 3,815
Change in operating assets and liabilities (3,815) (4,740)
---------- -----------
Net cash provided by operating activities 15,009 6,950
CASH FLOWS FROM INVESTING ACTIVITIES:
Cash paid for acquisitions (2,329) (10,464)
Capital expenditures (5,204) (4,281)
Other 742
---------- -----------
Net cash used in investing activities (6,791) (14,745)
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments on term loan (4,360) (969)
Net borrowings (payments) on revolving credit facility (1,500) 4,590
---------- -----------
Net cash provided by (used in) financing activities (5,860) 3,621
EFFECT OF EXCHANGE RATE CHANGES ON CASH (179) (208)
----------- -----------
Net increase (decrease) in cash and cash equivalents 2,179 (4,382)
Cash and cash equivalents at beginning of period 508 4,762
---------- -----------
Cash and cash equivalents at end of period $ 2,687 $ 380
========== ===========
SUPPLEMENTAL CASH FLOW DISCLOSURES:
NON CASH TRANSACTIONS:
Preferred stock dividends $ 9,298 $ 3,650
========== ===========
Amortization of preferred stock discount $ 141 $ 126
========== ===========
</TABLE>
See notes to condensed consolidated financial statements.
5
<PAGE> 6
DAY INTERNATIONAL GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS)
A. BASIS OF PRESENTATION
The balance sheet as of December 31, 1999, is condensed financial information
derived from the audited balance sheet. The interim financial statements are
unaudited. The financial statements of Day International Group, Inc. (the
"Company") have been prepared in accordance with accounting principles generally
accepted in the United States of America and, in the opinion of management,
reflect all adjustments (consisting of normal recurring accruals) necessary for
a fair presentation in accordance with generally accepted accounting principles
for the periods presented. The results of operations and cash flows for the
interim periods presented are not necessarily indicative of the results for the
full year.
B. INVENTORIES
Inventories as of September 30, 2000 and December 31, 1999, consists of:
SEPTEMBER DEC. 31,
30, 2000 1999
----------- -----------
Finished goods $ 18,431 $ 16,386
Work in process 5,612 6,232
Raw materials 10,721 10,213
---------- -----------
$ 34,764 $ 32,831
========== ===========
C. BUSINESS SEGMENTS
The Company produces precision engineered rubber products, specializing in the
design and customization of consumable image-transfer products for the graphic
arts (printing) industry, fiber handling products for the textile industry and
pressroom chemicals and automatic dampening systems for the printing industry.
The Image Transfer segment designs, manufactures and markets high-quality
printing blankets and sleeves used in the offset and flexographic printing
industries. The Textile Products segment manufactures and markets precision
engineered rubber cots and aprons sold to textile yarn spinners and other
engineered rubber products sold to diverse markets. The Varn segment designs,
manufactures and markets pressroom chemicals and automatic dampening systems
used in the printing industry.
Segment performance is evaluated based on operating profit results compared to
the annual operating plan. Intersegment sales and transfers are not material.
The Company manages the three segments as separate strategic business units.
They are managed separately because each business unit requires different
manufacturing processes, technology and marketing strategies.
6
<PAGE> 7
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------- -------------
2000 1999 2000 1999
---------- ----------- ---------- -----------
<S> <C> <C> <C> <C>
Third party sales:
Image Transfer $ 40,173 $ 37,400 $ 118,226 $ 108,731
Textile Products 13,853 7,169 43,791 21,929
Varn 15,741 48,470
---------- ----------- ---------- -----------
Total $ 69,767 $ 44,569 $ 210,487 $ 130,660
========== =========== ========== ===========
Segment operating profit:
Image Transfer $ 11,427 $ 10,694 $ 32,356 $ 29,265
Textile Products 2,022 262 6,119 1,012
Varn 1,199 4,467
---------- ----------- ---------- -----------
Total $ 14,648 $ 10,956 $ 42,942 $ 30,277
========== =========== ========== ===========
</TABLE>
The following is a reconciliation of the segment operating profit reported above
to the amount reported in the consolidated financial statements:
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------- -------------
2000 1999 2000 1999
---------- ----------- ---------- -----------
<S> <C> <C> <C> <C>
Segment operating profit $ 14,648 $ 10,956 $ 42,942 $ 30,277
APB #16 depreciation and amortization (1,166) (1,622) (3,451) (3,666)
Non-allocated corporate expenses (229) (114) (555) (471)
Amortization of intangibles (1,069) (903) (3,223) (2,714)
Management fees (275) (276) (825) (806)
---------- ----------- ---------- -----------
Total operating profit $ 11,909 $ 8,041 $ 34,888 $ 22,620
========== =========== ========== ===========
</TABLE>
<TABLE>
<CAPTION>
D. COMPREHENSIVE INCOME (LOSS)
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------- -------------
2000 1999 2000 1999
---------- ----------- ---------- -----------
<S> <C> <C> <C> <C>
Net income $ 2,098 $ 629 $ 4,385 $ 918
Foreign currency translation adjustment 146 1,114 785 (1,644)
---------- ----------- ---------- -----------
Comprehensive income (loss) $ 2,244 $ 1,743 $ 5,170 $ (726)
========== =========== ========== ===========
</TABLE>
7
<PAGE> 8
E. CONTINGENCIES
Claims have been made against the Company for the costs of environmental
remedial measures taken or to be taken. Reserves for such liabilities have been
established and no insurance recoveries have been anticipated in the
determination of the reserves. In management's opinion, the aforementioned
claims will be resolved without material adverse effect on the results of
operations, financial position or cash flows of the Company. A previous owner,
M.A. Hanna, has agreed to indemnify the Company for certain of the costs
associated with these matters.
F. NEW ACCOUNTING PRINCIPLES
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivatives
Instruments and Hedging Activities." SFAS No. 133 will be effective for the
Company as of January 1, 2001. The Company is evaluating the impact of SFAS No.
133 on its financial statements and risk management practices. This Statement is
not expected to have a material impact on the Company's consolidated results of
operations, financial position or cash flows.
In December 1999, the Securities and Exchange Commission ("SEC"), issued Staff
Accounting Bulletin ("SAB") No. 101, "Revenue Recognition in Financial
Statements." The SAB clarifies the SEC's position on various revenue recognition
issues and allows until the fourth quarter of the year ending December 31, 2000,
for companies to comply with the guidance. The Company does not expect the SAB
to have an impact on its consolidated results of operations, financial position
or cash flows as its revenue recognition policies are in compliance with the
guidance.
G. SUPPLEMENTAL CONSOLIDATING INFORMATION
The Company has outstanding $100,000, 11-1/8% Senior Notes and $115,000, 9 1/2%
Senior Subordinated Notes (collectively, the "Notes"). The Company has no assets
or operations other than its wholly-owned investment in Day International, Inc.
("Day International" or "Guarantor"). Day International has provided a full and
unconditional guarantee of the Notes. The wholly-owned foreign subsidiaries of
Day International are not guarantors with respect to the Notes and do not have
any credit arrangements senior to the Notes. The only intercompany eliminations
are the normal intercompany eliminations with regard to intercompany sales and
the Company's investment in its wholly-owned subsidiaries. Intercompany notes
are in place which effectively transfer the interest expense from the Company to
Day International. The following are the supplemental combining condensed
balance sheets as of September 30, 2000 and December 31, 1999, and the
supplemental combining condensed statements of operations and cash flows for the
three months and nine months ended September 30, 2000 and 1999, with the
investments in the subsidiaries accounted for using the equity method. Separate
complete financial statements of the Guarantor are not presented because
management has determined that they are not material to the investors.
8
<PAGE> 9
DAY INTERNATIONAL GROUP, INC.
SUPPLEMENTAL COMBINING CONDENSED BALANCE SHEET
SEPTEMBER 30, 2000
<TABLE>
<CAPTION>
DAY
DAY INTER-
INTER- NATIONAL NON
NATIONAL INC. GUARANTOR
GROUP, INC. (GUARANTOR) SUBSIDIARIES ELIMINATIONS CONSOLIDATED
----------- ----------- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
ASSETS
Cash and cash equivalents $ 949 $ (938) $ 2,676 $ $ 2,687
Accounts receivable - net 19,228 17,851 37,079
Inventories 22,183 12,581 34,764
Other current assets 4,212 5,166 9,378
------------- ------------- ------------- ------------- -------------
TOTAL CURRENT ASSETS 949 44,685 38,274 83,908
Intercompany 272,690 (272,690)
Property, plant and equipment, net 47,789 19,000 66,789
Investment in subsidiaries (46,584) 34,810 3,219 8,555
Intangible and other assets 166,570 14,432 181,002
------------- ------------- ------------- ------------- -------------
TOTAL ASSETS $ 227,055 $ 293,854 $ 74,925 $ (264,135) $ 331,699
============= ============= ============= ============= =============
LIABILITIES AND
STOCKHOLDERS' EQUITY (DEFICIT)
Accounts payable $ $ 4,072 $ 4,014 $ $ 8,086
Current maturities of long-term debt 6,533 30 6,563
Other current liabilities 4,701 13,718 12,533 30,952
------------- ------------- ------------- ------------- -------------
TOTAL CURRENT LIABILITIES 11,234 17,790 16,577 45,601
Intercompany (51,863) 316,968 1,519 (266,624)
Long-term and subordinated long-term
debt 266,157 1,281 267,438
Other long-term liabilities 16,276 5,186 21,462
Exchangeable preferred stock 45,971 45,971
Total stockholders' equity (deficit) (44,444) (57,180) 50,362 2,489 (48,773)
------------- ------------ ------------- ------------- -------------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY (DEFICIT) $ 227,055 $ 293,854 $ 74,925 $ (264,135) $ 331,699
============= ============= ============= ============= =============
</TABLE>
9
<PAGE> 10
DAY INTERNATIONAL GROUP, INC.
SUPPLEMENTAL COMBINING CONDENSED BALANCE SHEET
DECEMBER 31, 1999
<TABLE>
<CAPTION>
DAY
DAY INTER-
INTER- NATIONAL NON
NATIONAL INC. GUARANTOR
GROUP, INC. (GUARANTOR) SUBSIDIARIES ELIMINATIONS CONSOLIDATED
----------- ----------- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
ASSETS
Cash and cash equivalents $ 377 $ (1,773) $ 1,904 $ $ 508
Accounts receivable - net 17,605 17,635 35,240
Inventories 19,879 12,952 32,831
Other current assets 3,775 3,056 6,831
------------- ------------- ------------- ------------- -------------
TOTAL CURRENT ASSETS 377 39,486 35,547 75,410
Intercompany 278,408 (278,408)
Property, plant and equipment, net 48,763 20,976 69,739
Investment in subsidiaries (50,978) 35,395 15,583
Intangible and other assets 166,306 20,049 186,355
------------- ------------- ------------- ------------- -------------
TOTAL ASSETS $ 227,807 $ 289,950 $ 76,572 $ (262,825) $ 331,504
============= ============= ============= ============= =============
LIABILITIES AND
STOCKHOLDERS' EQUITY (DEFICIT)
Accounts payable $ $ 5,762 $ 3,141 $ $ 8,903
Current maturities of long-term debt 3,297 64 3,361
Other current liabilities 4,631 13,159 11,696 29,486
------------- ------------- ------------- ------------- -------------
TOTAL CURRENT LIABILITIES 7,928 18,921 14,901 41,750
Intercompany (52,374) 315,700 14,295 (277,621)
Long-term and subordinated long-term
debt 275,111 1,358 276,469
Other long-term liabilities 14,704 6,553 21,257
Exchangeable preferred stock 41,745 41,745
Total stockholders' equity (deficit) (44,603) (59,375) 39,465 14,796 (49,717)
------------- ------------ ------------- ------------- -------------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY (DEFICIT) $ 227,807 $ 289,950 $ 76,572 $ (262,825) $ 331,504
============= ============= ============= ============= =============
</TABLE>
10
<PAGE> 11
DAY INTERNATIONAL GROUP, INC.
SUPPLEMENTAL COMBINING CONDENSED STATEMENT OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 2000
<TABLE>
<CAPTION>
DAY
DAY INTER-
INTER- NATIONAL NON
NATIONAL INC. GUARANTOR
GROUP, INC. (GUARANTOR) SUBSIDIARIES ELIMINATIONS CONSOLIDATED
----------- ----------- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Net sales $ $ 44,887 $ 24,880 $ $ 69,767
Cost of goods sold 26,970 14,994 41,964
------------- ------------- ------------- ------------- -------------
Gross profit 17,917 9,886 27,803
Selling, general and administrative 17 9,239 5,294 14,550
Amortization of intangibles 1,001 68 1,069
Management fees 275 275
------------- ------------- ------------- ------------- -------------
Operating profit (17) 7,402 4,524 11,909
Other (income) expense:
Equity in (earnings) of subsidiaries (2,106) (1,993) 4,099
Interest expense 7,517 5 7,522
Other (income) expense (5) (212) 1,548 1,331
------------- ------------- ------------- ------------- -------------
Income before income taxes 2,094 2,090 2,971 (4,099) 3,056
Income taxes (benefit) (4) (16) 978 958
------------- ------------- ------------- ------------- -------------
Net income $ 2,098 $ 2,106 $ 1,993 $ (4,099) $ 2,098
============= ============= ============= ============= =============
</TABLE>
11
<PAGE> 12
DAY INTERNATIONAL GROUP, INC.
SUPPLEMENTAL COMBINING CONDENSED STATEMENT OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 1999
<TABLE>
<CAPTION>
DAY
DAY INTER-
INTER- NATIONAL NON
NATIONAL INC. GUARANTOR
GROUP, INC. (GUARANTOR) SUBSIDIARIES ELIMINATIONS CONSOLIDATED
----------- ----------- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Net sales $ $ 31,739 $ 12,830 $ $ 44,569
Cost of goods sold 18,892 9,050 27,942
------------- ------------- ------------- ------------- -------------
Gross profit 12,847 3,780 16,627
Selling, general and administrative 1 5,145 2,261 7,407
Amortization of intangibles 822 81 903
Management fees 276 276
------------- ------------- ------------- ------------- -------------
Operating profit (1) 6,604 1,438 8,041
Other (income) expense:
Equity in (earnings) of subsidiaries (625) (762) 1,387
Interest expense 6,863 6,863
Other (income) expense (9) (33) 111 69
------------- ------------- ------------- ------------- -------------
Income before income taxes 633 536 1,327 (1,387) 1,109
Income taxes (benefit) 4 (89) 565 480
------------- ------------- ------------- ------------- -------------
Net income $ 629 $ 625 $ 762 $ (1,387) $ 629
============= ============= ============= ============= =============
</TABLE>
12
<PAGE> 13
DAY INTERNATIONAL GROUP, INC.
SUPPLEMENTAL COMBINING CONDENSED STATEMENT OF OPERATIONS
NINE MONTHS ENDED SEPTEMBER 30, 2000
<TABLE>
<CAPTION>
DAY
DAY INTER-
INTER- NATIONAL NON
NATIONAL INC. GUARANTOR
GROUP, INC. (GUARANTOR) SUBSIDIARIES ELIMINATIONS CONSOLIDATED
----------- ----------- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Net sales $ $ 132,463 $ 78,024 $ $ 210,487
Cost of goods sold 80,282 46,678 126,960
------------- ------------- ------------- ------------- -------------
Gross profit 52,181 31,346 83,527
Selling, general and administrative 24 28,350 16,217 44,591
Amortization of intangibles 3,007 216 3,223
Management fees 825 825
------------- ------------- ------------- ------------- -------------
Operating profit (24) 19,999 14,913 34,888
Other (income) expense:
Equity in (earnings) of subsidiaries (4,395) (6,676) 11,071
Interest expense 1 22,677 10 22,688
Other (income) expense (10) 1,177 4,623 5,790
------------- ------------- ------------- ------------- -------------
Income before income taxes 4,380 2,821 10,280 (11,071) 6,410
Income taxes (benefit) (5) (1,574) 3,604 2,025
------------- ------------- ------------- ------------- -------------
Net income $ 4,385 $ 4,395 $ 6,676 $ (11,071) $ 4,385
============= ============= ============= ============= =============
</TABLE>
13
<PAGE> 14
DAY INTERNATIONAL GROUP, INC.
SUPPLEMENTAL COMBINING CONDENSED STATEMENT OF OPERATIONS
NINE MONTHS ENDED SEPTEMBER 30, 1999
<TABLE>
<CAPTION>
DAY
DAY INTER-
INTER- NATIONAL NON
NATIONAL INC. GUARANTOR
GROUP, INC. (GUARANTOR) SUBSIDIARIES ELIMINATIONS CONSOLIDATED
----------- ----------- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Net sales $ $ 92,417 $ 38,243 $ $ 130,660
Cost of goods sold 55,256 26,474 81,730
------------- ------------- ------------- ------------- -------------
Gross profit 37,161 11,769 48,930
Selling, general and administrative 12 15,811 6,967 22,790
Amortization of intangibles 2,468 246 2,714
Management fees 806 806
------------- ------------- ------------- ------------- -------------
Operating profit (12) 18,076 4,556 22,620
Other (income) expense:
Equity in (earnings) of subsidiaries (917) (2,482) 3,399
Interest expense 20,608 20,608
Other (income) expense (14) 35 316 337
------------- ------------- ------------- ------------- -------------
Income (loss) before income taxes 919 (85) 4,240 (3,399) 1,675
Income taxes (benefit) 1 (1,002) 1,758 757
------------- ------------- ------------- ------------- -------------
Net income $ 918 $ 917 $ 2,482 $ (3,399) $ 918
============= ============= ============= ============= =============
</TABLE>
14
<PAGE> 15
DAY INTERNATIONAL GROUP, INC.
SUPPLEMENTAL COMBINING CONDENSED STATEMENT OF CASH FLOWS
NINE MONTHS ENDED SEPTEMBER 30, 2000
<TABLE>
<CAPTION>
DAY
DAY INTER-
INTER- NATIONAL NON
NATIONAL INC. GUARANTOR
GROUP, INC. (GUARANTOR) SUBSIDIARIES ELIMINATIONS CONSOLIDATED
----------- ----------- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Cash Flows From Operating Activities:
Net income $ 4,385 $ 4,395 $ 6,676 $ (11,071) $ 4,385
Adjustments to reconcile net
income to net cash provided by
(used in) operating activities:
Depreciation and amortization 11,439 1,927 13,366
Equity in (earnings) loss of subsidiaries (4,395) (6,676) 11,071
Deferred income taxes and other (1,631) (1,111) (2,742)
Foreign currency loss 290 3,525 3,815
Changes in operating assets and liabilities 71 (8,811) 4,925 (3,815)
------------- ------------- ------------- ------------- -------------
Net cash provided by (used in)
operating activities 61 (994) 15,942 15,009
Cash Flows From Investing Activities:
Cash paid for acquisitions (2,329) (2,329)
Capital expenditures (3,464) (1,740) (5,204)
Other 742 742
------------- ------------- ------------- ------------- -------------
Net cash used in investing activities (5,793) (998) (6,791)
Cash Flows From Financing Activities:
Payments on term loan (4,250) (110) (4,360)
Net payments on credit facilities (1,500) (1,500)
------------- ------------- ------------- ------------- -------------
Net cash used in financing activities (5,750) (110) (5,860)
Intercompany transfers and dividends 6,261 7,622 (13,883)
Effects of exchange rates on cash (179) (179)
------------- ------------- ------------- ------------- -------------
Net increase (decrease) in cash and
cash equivalents 572 835 772 2,179
Cash and cash equivalents at
beginning of period 377 (1,773) 1,904 508
------------- ------------- ------------- ------------- -------------
Cash and cash equivalents at end of period $ 949 $ (938) $ 2,676 $ $ 2,687
============= ============== ============= ============= =============
</TABLE>
15
<PAGE> 16
DAY INTERNATIONAL GROUP, INC.
SUPPLEMENTAL COMBINING CONDENSED STATEMENT OF CASH FLOWS
NINE MONTHS ENDED SEPTEMBER 30, 1999
<TABLE>
<CAPTION>
DAY
DAY INTER-
INTER- NATIONAL NON
NATIONAL INC. GUARANTOR
GROUP, INC. (GUARANTOR) SUBSIDIARIES ELIMINATIONS CONSOLIDATED
----------- ----------- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Cash Flows From Operating Activities:
Net income $ 918 $ 917 $ 2,482 $ (3,399) $ 918
Adjustments to reconcile net
income to net cash provided by
(used in) operating activities:
Depreciation and amortization 10,062 1,669 11,731
Equity in (earnings) loss of subsidiaries (917) (2,482) 3,399
Deferred income taxes and other (959) (959)
Changes in operating assets and liabilities 102 (1,638) (2,372) (832) (4,740)
------------- ------------- ------------- ------------- -------------
Net cash provided by (used in)
operating activities 103 5,900 1,779 (832) 6,950
Cash Flows From Investing Activities:
Cash paid for acquisition (10,464) (10,464)
Capital expenditures (2,604) (1,677) (4,281)
------------- ------------- ------------- ------------- -------------
Net cash used in investing activities (10,464) (2,604) (1,677) (14,745)
Cash Flows From Financing Activities:
Payments on term loans (969) (969)
Net borrowings on credit facilities 4,590 4,590
------------- ------------- ------------- ------------- -------------
Net cash provided by financing activities 3,621 3,621
Intercompany transfers and dividends 4,498 (3,771) (1,559) 832
Effects of exchange rates on cash (208) (208)
------------- ------------- ------------- ------------- -------------
Net increase (decrease) in cash and
cash equivalents (2,242) (475) (1,665) (4,382)
Cash and cash equivalents at
beginning of period 3,256 (955) 2,461 4,762
------------- ------------- ------------- ------------- -------------
Cash and cash equivalents at end of period $ 1,014 $ (1,430) $ 796 $ $ 380
============= ============= ============= ============= =============
</TABLE>
16
<PAGE> 17
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
On September 30, 1999 and October 19, 1999, the textile products operations of
Armstrong World Industries, Inc. ("TPO") and Varn International ("Varn"),
respectively, were acquired. Accordingly, the results of operations for
historical as well as future periods may not be comparable to prior periods.
BASIS OF PRESENTATION
The following table sets forth selected financial information in millions of
dollars and as a percentage of net sales:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
------------------ -----------------
September 30, September 30,
------------- -------------
2000 1999 2000 1999
---- ---- ---- ----
$ % $ % $ % $ %
------ ----- ----- ----- ------- ----- ----- ---
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net sales 69.8 100.0 44.6 100.0 210.5 100.0 130.7 100.0
Costs of goods sold 42.0 60.1 27.9 62.6 127.0 60.3 81.7 62.5
------ ------- ------- ------ ------ ------- ------- ------
Gross profit 27.8 39.9 16.6 37.4 83.5 39.7 48.9 37.5
Selling, general and administrative expense 14.5 20.9 7.4 16.6 44.6 21.2 22.8 17.4
Amortization of intangibles 1.1 1.5 0.9 2.0 3.2 1.5 2.7 2.1
Management fees 0.3 0.4 0.3 0.7 0.8 0.4 0.8 0.6
------ ------- ------- ------ ------ ------- ------- ------
Operating profit 11.9 17.1 8.0 17.9 34.9 16.6 22.6 17.3
====== ======= ======= ====== ====== ======= ======= ======
</TABLE>
COMPARISON OF RESULTS OF OPERATIONS
Three Months Ended September 30, 2000 Compared to Three Months Ended September
30, 1999
Net sales increased to $69.8 million for the three months ended September 30,
2000, from $44.6 million for the comparable period in 1999, an increase of $25.2
million or 56.5%. Image Transfer's sales increased to $40.1 million for the
three months ended September 30, 2000, from $37.4 million for the comparable
period in 1999, an increase of $2.7 million or 7.4%. Image Transfer sales
increased as a result of higher volumes across all markets, offset by a negative
impact of $1.5 million related to foreign currency rate changes compared to the
same period in 1999. Textile Products' sales increased to $13.9 million for the
three months ended September 30, 2000, from $7.2 million for the comparable
period in 1999, an increase of $6.7 million or 94.0%. Textile Products' sales
increased primarily as a result of the purchase of TPO in late 1999. The
acquisition of Varn contributed $15.8 million of net sales in the three months
ended September 30, 2000.
Gross profit increased $11.2 million to $27.8 million for the three months ended
September 30, 2000, from $16.6 million for the three months ended September 30,
1999, primarily as a result of the acquired operations of TPO and Varn in the
three months ended September 30, 2000 and the increase in Image Transfer sales.
As a percentage of net sales, gross profit increased to 39.9% for the three
months ended September 30, 2000, compared to 37.4% for the three months ended
September 30, 1999, primarily as a result of improved margins in the Textile
Products business realized from efficiencies generated in combining TPO with the
Company's existing Textile Products business.
17
<PAGE> 18
Selling, general and administrative expense ("SG&A") increased to $14.5 million
for the three months ended September 30, 2000, from $7.4 million for the
comparable period in 1999, an increase of $7.1 million or 96.4%. Varn and TPO
accounted for the majority of the increase. As a percentage of net sales, SG&A
increased to approximately 20.9% from 16.6%. The increase in SG&A as a percent
of sales is a result of higher selling costs of Varn as compared to the other
segments. Foreign currency rate changes had a minimal impact on SG&A in the
third quarter of 2000 compared to the third quarter of 1999.
Amortization of intangibles increased to $1.1 million for the three months ended
September 30, 2000, from $0.9 million for the comparable period in 1999, an
increase of $0.2 million. The increase is a result of the amortization of
intangibles from the Varn acquisition.
Operating profit increased to $11.9 million for the three months ended September
30, 2000, from $8.0 million, for the comparable period in 1999, an increase of
$3.9 million or 48.1%. As a percentage of net sales, operating profit decreased
to 17.1% for the three months ended September 30, 2000, from 17.9% for the
comparable period in 1999.
Other expense was $1.3 million for the three months ended September 30, 2000,
compared to $0.1 million for the three months ended September 30, 1999. The
increase was primarily due to foreign currency transaction losses incurred in
the normal course of international subsidiaries doing business in other than
their functional currency as well as a result of intercompany financing
arrangements.
The effective tax rate for the third quarter of 2000 was 31.3% compared to 43.3%
for the third quarter of 1999. The lower effective tax rate in 2000 resulted
primarily from the tax benefit of the foreign currency transaction losses in
countries with higher tax rates.
Nine Months Ended September 30, 2000 Compared to Nine Months Ended September 30,
1999
Net sales increased to $210.5 million for the nine months ended September 30,
2000, from $130.7 million for the comparable period in 1999, an increase of
$79.8 million or 61.1%. Image Transfer's sales increased to $118.2 million for
the nine months ended September 30, 2000, from $108.7 million for the comparable
period in 1999, an increase of $9.5 million or 8.7%. Image Transfer sales
increased as a result of higher volumes across all markets, offset by a negative
impact of $3.7 million related to foreign currency translation rate changes
compared to the same period in 1999. Textile Products' sales increased to $43.8
million for the nine months ended September 30, 2000, from $21.9 million for the
comparable period in 1999, an increase of $21.9 million or 99.7%. Textile
Products' sales increased primarily as a result of the purchase of TPO in late
1999. The acquisition of Varn contributed $48.5 million of net sales in the nine
months ended September 30, 2000.
Gross profit increased $34.6 million to $83.5 million for the nine months ended
September 30, 2000, from $48.9 million for the nine months ended September 30,
1999, primarily as a result of the acquired operations of TPO and Varn in the
nine months ended September 30, 2000 and the increase in Image Transfer sales.
As a percentage of net sales, gross profit increased to 39.7% for the nine
months ended September 30, 2000, compared to 37.4% for the nine months ended
September 30, 1999, primarily as a result of improved margins in the Textile
Products business realized from efficiencies generated in combining TPO with the
Company's existing Textile Products business.
18
<PAGE> 19
Selling, general and administrative expense ("SG&A") increased to $44.6 million
for the nine months ended September 30, 2000, from $22.8 million for the
comparable period in 1999, an increase of $21.8 million or 95.7%. Varn and TPO
accounted for almost the entire increase. As a percentage of net sales, SG&A
increased to approximately 21.2% from 17.4%. The increase in SG&A as a percent
of sales is a result of higher selling costs of Varn as compared to the other
segments.
Amortization of intangibles increased to $3.2 million for the nine months ended
September 30, 2000, from $2.7 million for the comparable period in 1999, an
increase of $0.5 million. The increase is a result of the amortization of
intangibles from the Varn acquisition.
Operating profit increased to $34.9 million for the nine months ended September
30, 2000, from $22.6 million, for the comparable period in 1999, an increase of
$12.3 million or 54.2%. As a percentage of net sales, operating profit decreased
to 16.6% for the nine months ended September 30, 2000, from 17.3% for the
comparable period in 1999.
Other expense was $5.8 million for the nine months ended September 30, 2000,
compared to $0.3 million for the nine months ended September 30, 1999. The
increase was primarily due to foreign currency transaction losses incurred in
the normal course of international subsidiaries doing business in other than
their functional currency as well as a result of intercompany financing
arrangements.
The effective tax rate for the nine months ended September 30, 2000 was 31.6%
compared to 45.2% for the nine months ended September 30, 1999. The lower
effective tax rate in 2000 resulted primarily from the tax benefit of the
foreign currency transaction losses in countries with higher tax rates.
LIQUIDITY AND CAPITAL RESOURCES
The Company has historically generated sufficient funds from its operations to
fund its working capital and capital expenditure requirements. Utilizing
converters and distributors to distribute the majority of its products, the
Company is able to maintain relatively minimal levels of working capital as its
converters and distributors typically carry a greater portion of inventory and
finance receivables of the Company's end users.
Cash Flows From Operating Activities. Cash flows provided by operations for the
nine months ended September 30, 2000 and 1999, were $15.0 million and $6.9
million, respectively. The increase is primarily due to operating cash flows
from the businesses acquired in 1999.
Cash Flows From Investing Activities. Capital expenditures were $5.2 million and
$4.3 million for the nine months ended September 30, 2000 and 1999,
respectively.
Cash Flows From Financing Activities. In the nine months ended September 30,
2000, the Company paid $1.5 million on its Revolving Credit Facility. The
Company paid $4.4 million on its outstanding term loan and capital lease in the
nine months ended September 30, 2000. As of September 30, 2000, there was $4.0
million outstanding under the Revolving Credit Facility and the Company had
approximately $14.9 million available under the Revolving Credit Facility
(calculated by applying the applicable borrowing base limitation).
19
<PAGE> 20
The Company's aggregate indebtedness at September 30, 2000, is approximately
$274.0 million and the aggregate liquidation preferences of the Exchangeable
Preferred Stock is $47.6 million and the Convertible Preferred Stock is $45.1
million. The Company is highly leveraged. The Company's ability to operate its
business, service its debt requirements and reduce its total debt will depend
upon its future operating performance, which will be affected by prevailing
economic conditions and financial, business and other factors, certain of which
are beyond its control, as well as the availability of revolving credit
borrowings. See the Company's Annual Report on Form 10-K for a more extensive
discussion of liquidity and capital resources.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
RISKS ASSOCIATED WITH INTERNATIONAL OPERATIONS
The Company conducts a significant amount of business and has operating and
sales facilities in countries outside the United States. As a result, the
Company is subject to business risks inherent in non-U.S. activities, including
political uncertainty, import and export limitations, exchange controls and
currency fluctuations. The Company believes risks related to its foreign
operations are mitigated due to the political and economic stability of the
countries in which its largest foreign operations are located, the stand-alone
nature of the operations, the Company's limited net asset exposure, forward
foreign exchange contract practices and pricing flexibility. Thus, while changes
in foreign currency values do affect earnings, management does not expect the
longer-term economic effect of these changes to have a material adverse effect
on the Company's financial condition, results of operations or liquidity.
Certain of the Company's international subsidiaries make purchases in foreign
currencies, mainly intercompany transactions. As a result, they are subject to
transaction exposures that arise from foreign exchange movements between the
date that the foreign currency transaction is recorded and the date it is
consummated. The Company has entered into forward foreign exchange contracts to
protect it against such foreign exchange movements. The contract amount of these
foreign exchange contracts was approximately $4.1 million at September 30, 2000
and approximately $0.9 million at December 31, 1999. These contracts generally
expire within three to twelve months. Foreign currency transaction losses,
included in other (income) expense, were $6.0 million in 2000 and $0.3 million
in 1999.
INTEREST RATE RISKS
The Company is subject to market risk from exposure to changes in interest
rates. The Company has the Notes and the Revolving Credit Facility to maintain
the desired level of exposure to risk of interest rate fluctuations and to
minimize interest expense. The Company utilizes a mix of debt maturities along
with both fixed- and variable-rate debt to manage its exposure to changes in
interest rates. The Company does not expect changes in interest rates to have a
material effect on income or cash flows in 2000, although there can be no
assurances that interest rates will not materially change.
20
<PAGE> 21
COMMODITY RISKS
Rubber polymers and fabrics are key components in most of the Company's Image
Transfer and Textile products. The Company is exposed to changes in the costs of
these components. Varn is exposed to changes in the cost of certain
petroleum-based components. The largest raw material component in Varn's
products is petroleum distillates, such as aliphatics and aromatics. When
commodity prices increase, the Company has historically passed on increases to
its customers to maintain its profit margins. Conversely, when commodity prices
decline, the Company generally lowers its sales prices to meet competitive
pressures. During the year, the Company has instituted several price increases
to offset the impact of increases in petroleum prices on its raw material costs.
Because the Company has historically been able to raise sales prices to offset
higher costs, management believes that a 10% change in the cost of its
components could have a short term impact until sales price increases take
effect, but overall would not have a material effect on income or cash flows for
a fiscal year.
PART II OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a. Exhibits
(27) Financial Data Schedule
b. Reports on Form 8-K
None
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Day International Group, Inc.
-----------------------------
(Registrant)
Date: November 6, 2000 /s/ Thomas J. Koenig
---------------- ---------------------
Thomas J. Koenig
Vice President and
Chief Financial Officer
(Principal Financial Officer)
21
